The US bond and stocks extended their rally on the back of soft US economic data and another strong US bond auction. The US dollar fell sharply against most majors, allowing the euro, sterling, and the yen to extend gains into the year-end. The rally in the sovereign space looks overdone, hence the rally in stocks and the selloff in the US dollar looks overstretched; there is a rising risk of a wild correction when the euphoria comes to an end.
The Stock and Bond Rally Continues
Wednesday was yet another day of joy and euphoria for the Federal Reserve (Fed) doves, and another day of selloff for the US dollar. This week’s economic calendar is not heavy, but the little data feeds the Fed doves successfully, I should admit. Released yesterday, the Richmond Manufacturing index came in much softer than expected – hinting at a significantly faster slowdown in economic activity in December, shipments also contracted significantly compared to a year ago. The slowing activity fueled the Fed doves along with another strong US bond auction on Wednesday that followed other strong bond auctions the day before. The US 5-year paper saw a bumper demand, as investors continued to pile in to secure good deals at the current yields based on the expectation that the yields will further crumble when the Fed starts chopping the rates. As such, the US 5-year yields fell to 3.80%,the 2-year yield sank to 4.23%, and the 10-year yield tipped a toe below the 3.80% level. Isn’t it marvelous? Well, yes, it is, especially for the rate-sensitive technology stocks. The Nasdaq 100 renewed record yesterday, whereas the S&P 500 was trading just 0.3% below its own ATH level, yet couldn’t yet declare a fresh record – I am confident that it will come.
In the FX, the US dollar was hit hard by the accelerated fall in sovereign yields. The dollar index sank below 101 on the back of yet another sharp fall in the US yields. The broad-based selloff in the USD propelled the EUR/USD past the 1.11 mark. Cable jumped above the 1.28 level, the USD/JPY eased to 141.
Overdone
The US has recorded the biggest two-month easing in financial conditions in its history because of the impressive US sovereign rally on rising Fed rate cut expectations. It appears that the latest easing in the US financial conditions has been more powerful than the ones observed following the announcements of the Quantitative Easing programs from the Fed. And the rapidly loosening financial conditions are hardly compatible with sustainably low inflation even less so as the geopolitical tensions started to disrupt global trade ways in a way that could be inflationary.
One good news is oil’s inability to ensure a sustained price rise. The barrel of US crude snapped back below the $74pb after testing the $76pb on rising Red Sea tensions.